GBP/USD Forecast: Fed is the Main Game in Town This Week
GBPUSD is hovering around the psychologically crucial level of 1.2000 after bouncing back from the two-year low hit about two weeks ago at$1.1761. However, even with the rebound, it remains significantly below its highest level year-to-date of 1.3756. High inflation and a less aggressive BoE compared to the Fed continues to weigh on the Sterling pound.
Central banks’ position
UK inflation hit a fresh 40-year high in June YoY amid the soaring energy and food prices. Investors are now pricing in an increase of 50 basis points during the Bank of England (BoE) meeting scheduled for 4th August. With rising concerns over slowed economic growth and a probable recession, economists have differing opinions over the appropriateness of such a huge rate hike.
For instance, the Bank of America (BofA) forecasts that the UK economy will fall into a recession in 2023 as high inflation, decline in consumer demand, and the aggressive tightening of BoE’s monetary policy weighs on growth. Indeed, BoE is in a dilemma on whether it should join the number of central banks approving super-sized rate hikes or whether the signs of a recession mean it could tread cautiously.
At the same time, the set for release on Wednesday has been one of the highly anticipated events since the beginning of the week. Analysts expect the US central bank to approve a super-sized increase of 75 basis points in its July meeting after a similar one in June. So far, the Fed has raised its benchmark interest rates by 150 basis points.
Bets on aggressive rate hikes by the Fed have strengthened the US dollar; boosting it to a fresh 20-year high about two weeks ago. While it has since eased, the dollar index has been trading above the previously evasive zone of $105 since early July. Besides, concerns over slowed global economic growth has investors holding on to the greenback; which is a conventional safe haven in such times of economic turmoil.
